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State avoids $400m bill on carbon

Tom Arup and Josh Gordon

THE state government has narrowly avoided a carbon price bill of about $400 million under a secret deal struck with Alcoa whereby the Gillard government will cover much of the costs.

The State Electricity Commission of Victoria's annual report reveals the state budget was facing a $396 million carbon price hit triggered by a long-standing contract to supply cheap power to fuel Alcoa's Point Henry and Portland smelters.

Under the decades-old arrangement, the commission acts as an intermediary, purchasing power from Loy Yang B and on-selling it at a discounted price to the aluminium giant.

Because the commission is a corporate shell used to manage the supply arrangements with Alcoa, it was ineligible for federal compensation to cover the higher power costs due to the carbon price it has now agreed to take from the generator.

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The annual report reveals the Baillieu government succeeded in avoiding much of the impost by transferring $414 million in costs onto Alcoa's books, with the difference in numbers a result of a range of factors, including that the supply contracts are one year closer to ending in 2014 and 2016.

As revealed in The Age in June last year, under the new arrangement, negotiated by Treasurer Kim Wells and his department, the passed-on costs to Alcoa would trigger extra federal compensation for the company as a trade-exposed industry.

Under the terms of the agreement, the extra compensation will be transferred back to the state government from Alcoa, effectively leaving the Commonwealth to foot much of the bill.

It is understood Alcoa retains a proportion of the extra compensation - which comes as free carbon permits - after it argued the carbon tax would shorten the life of its smelters, leaving the state government out of pocket by tens of millions of dollars.

Alcoa could also win out further because compensation rates are calculated on a historical average of emissions per unit of production, meaning if its operations fall below that average it would still receive the same amount of free permits, which it can potentially on-sell instead or use to meet its liability under the tax.

Under the complex rules of the federal carbon price, special provisions are made for the aluminium industry, which typically has special supply deals with power companies given the large amount of power consumed.

The federal rules allow for recognition of any renegotiation of supply contracts to pass on extra carbon costs in the compensation handed to a company. The value of extra compensation is based on the general electricity market.

Neither the state government nor the owner of Loy Yang B would comment on the agreements. Alcoa has previously acknowledged a mutual beneficial deal has been reached but has refused to talk about details.

A spokesman for Climate Change Minister Greg Combet said the carbon compensation was ''designed to support jobs and provide the strongest incentive to reduce emissions and electricity use in sectors like aluminium smelting''.